Peugeot’s writedown shocker isn’t end of trouble

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The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

In a French corporate version of glasnost, PSA Peugeot Citroën is cleaning up its balance sheet and will write off assets to the tune of 4 billion euros – 28 percent of its current asset base, an amount equivalent to twice its current market capitalisation. Now it can focus on the future: it’s bleak.

The depreciation booked by Europe’s second-largest carmaker was partly due to the French regulator’s insistence that industrial companies and banks take a sobering look at the value of their assets. Peugeot took pains to stress that the move does not affect its cash positions, nor its solvency or liquidity. It will, however, knock off about a third of the company’s equity.

The decision still signals that the company’s management has given up any hope that the European car market will recover swiftly. It has already declined in four of the past five years, reaching a 17-year low in 2012, and it is expected to shrink further in 2013. About 11.5 million new cars will be sold this year – that’s 3.5 million less than in 2005.

The group says that the market will be in the doldrums “for the foreseeable future”. The European slump has hit the company hard, on account of its large exposure to Southern European markets. PSA is currently burning about 200 million euros a month. It has embarked on a restructuring plan that includes the politically-contentious closure of a French 8,000-worker factory. The company has teamed up with Opel, General Motor’s European branch, in a drive to cut costs. It hopes to stop losing money by the end of 2014.

Given the persistently grim outlook, and the European car market’s permanent production over-capacity, the steps taken so far probably won’t be enough to put the group on a safer footing. In which case PSA would have to start thinking about a possible state bailout. The French government a few months ago already threw a 7 billion euro lifeline to the carmaker’s financial arm. The finance ministry says that taking a stake in the family-controlled company is not on the agenda. Maybe it means “not yet”. But even taxpayers’ money wouldn’t spare the group the difficult decisions it still has to take to become viable again.